Tax Guru – Ker$tetter Letter

Q:

Subject: 1099-MISC

 

Hi Kerry,

 

My daughter is a salaried employee.  During the past year she received reimbursement for work-related travel expenses via an allowed mileage rate.  She just received a 1099-MISC reporting the total of the reimbursed amounts as if it were compensation.  The amount is too small to be deducted as an employee expense.  My tax software wants to treat this as taxable income which hardly seems fair or appropriate.  What should she do?  Thanks.

 

I forgot to mention that the amounts are being reported under Block 7, Non-employee expenses.

A:

She needs to list all of her personally incurred out of pocket business related expenses, including appropriate miles on her car  on Form 2106.  The reimbursements received should be reported on Line 7 in the appropriate columns.  As the Step 3 portion of the 2106 will show, if she received more in reimbursements than her expenses were, the excess amount only will have to be shown as income on Line 7 of her 1040.  If her net expenses were higher than the reimbursements, that excess will be entered on Schedule A.

If she doesn’t have enough deductions to itemize and uses the standard deduction, she should still include the 2106 and Schedule A with her 1040 just to show IRS that the amount from the 1099-MISC has been reported in the proper place (Line 7 of the 2106).  If these schedules aren’t included with the 1040, IRS could very easily mistake the 1099-MISC amount as unreported income and send your daughter a bill for taxes on that in a few years’ time, plus interest and penalties.  I have seen that happen on several occasions.

Your daughter should really be working with a professional tax advisor to make sure she is claiming all of the out of pocket business expenses to which she is entitled.

I hope this helps.

Kerry Kerstetter